Oil, Gas Rig Counts Drift Apart - Analyst Blog

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Posted 2/7/2012 2:30 PM by Zacks Equity Research from Zacks.com in Investing, Business, Stocks

Referenced Stocks: BHI, DO, HP, NBR, NE

In its weekly release, Houston-based oilfield services company Baker Hughes Inc. ( BHI ) reported a dip in the U.S. rig count (number of rigs searching for oil and gas in the country). This can be primarily attributed to a decrease in the tally of natural gas-directed rigs, partially offset by improved oil rig count.

The Baker Hughes rig count, issued since 1944, acts as an important yardstick for drilling contractors such as Transocean Inc. ( RIG ) , Diamond Offshore ( DO ) , Noble Corp. ( NE ) , Nabors Industries ( NBR ) , Patterson-UTI Energy ( PTEN ) , Helmerich & Payne ( HP ) , etc. in gauging the overall business environment of the oil and gas industry.

Analysis of the Data

Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 1,997 for the week ended February 3, 2012. This was down up by 11 from the previous week's count and represents the first decrease in 3 weeks.

Despite this, the current nationwide rig count is more than double that of the 6-year low of 876 (in the week ended June 12, 2009) and significantly exceeds the prior-year level of 1,739. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending August 29 and September 12.

Rigs engaged in land operations descended by 11 to 1,938, while inland waters activity and offshore drilling remained steady at 17 and 42, respectively.

Natural Gas Rig Count: The natural gas rig count decreased for the fourth week in a row to 745 (a drop of 32 rigs from the previous week). As per the most recent report, the number of gas-directed rigs is at their lowest level since November 20, 2009 and is down more than 20% from its 2011 peak of 936, reached during mid-October.

The current natural gas rig count remains 54% below its all-time high of 1,606 reached in late summer 2008, but has rebounded strongly after bottoming out to a 7-year low of 665 on July 17, 2009. In the year-ago period, there were 911 active natural gas rigs.

Oil Rig Count: The oil rig count was up by 20 to 1,245. The current tally - the highest since Baker Hughes started breaking up oil and natural gas rig counts in 1987 - is way above the previous year's rig count of 818. It has recovered strongly from a low of 179 in June 2009, rising roughly 7 times.

Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 7 was up by 1 from the previous week.

Rig Count by Type: The number of vertical drilling rigs remained flat at 606, while the horizontal/directional rig count (encompassing new drilling technology that has the ability to drill and extract gas from dense rock formations, also known as shale formations) was down by 11 at 1,391. In particular, horizontal rig units came off by 11 from last week's all-time high of 1,185.

To Conclude

As mentioned above, the natural gas rig count has been falling since the last few weeks, 189 rigs in fact (or 20%) from the recent highs of 934 in October 28. Is this bullish for natural gas fundamentals? The answer is "no," if we look at the U.S. production and the shift in rig composition.

With horizontal rig count - the technology responsible for the abundant gas drilling in domestic shale basins - currently close to its all-time high, output from these fields remains robust. As a result, gas inventories still remain at elevated levels - 25.4% above the 5-year average and 24.6% higher than the same period last year.

In fact, natural gas prices have dropped approximately 48% from last year's peak of about $5.00 per million Btu (MMBtu) in June to the current level of around $2.60 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

In the absence of major production cuts or a stronger economy to boost industrial demand, which is responsible for almost a third of gas consumption, we do not expect much upside in gas prices in the near term. This is prompting more and more companies to alter their spending patterns, away from gas to the more profitable liquids-rich projects.